Rupee Favored as Rajan Making Hay While Fed Delays: India Credit

Barclays Plc and SEB AB favor Indian
assets over Indonesian, as policy makers use a delay in tapering
of U.S. stimulus to repair the nation’s finances.

The extra cost of protecting bonds of State Bank of India,
a proxy for the sovereign, over those of Indonesia’s government
will drop from a one-year high as the shortfall in India’s
broadest measure of trade narrows, Barclays predicts. The rupee,
emerging Asia’s worst performer after the rupiah in 2013, gained
in the past three months and will have breathing room until the
Federal Reserve starts paring its asset purchases in March,
according to the U.K. lender.

Pacific Investment Management Co., which runs the world’s
biggest bond fund, said Reserve Bank of India Governor Raghuram Rajan made “hay while the sun shines” by buying dollars as the
rupee rallied. Foreign reserves increased by $7 billion to $254
billion at the end of October from August. Indonesia (IDCPIY)’s buffer
rose by $4 billion to $97 billion in the same period.

“India has steadily been working to prevent a repeat of
August,” Sean Yokota, the Singapore-based head of Asia strategy
at SEB, Sweden’s fourth-biggest bank by market value, said in a
Nov. 18 e-mail interview. “Upside risk to inflation is lower in
India” relative to Indonesia, according to Yokota.

Rajan has raised the RBI’s benchmark repurchase rate twice
since taking over as RBI governor at the start of September and
pledged to curb inflation. India’s consumer prices climbed 10.1
percent from a year earlier in October, compared with an 8.32
percent increase in Indonesia, official data show.

Deficits, Currencies

The spread between five-year credit default swaps of State
Bank of India and Indonesian sovereign debt touched 122 basis
points on Nov. 18, the highest since November 2012, according to
data provider CMA. Barclays last week cut its forecast for
India’s current-account deficit for the year through March 2014
by about $20 billion to $48.2 billion and raised its prediction
for Indonesia’s 2013 shortfall by $2 billion to $33.5 billion.

The rupee has weakened 12.5 percent to 62.8575 per dollar
this year, while the rupiah has slumped 17.7 percent to 11,713,
data compiled by Bloomberg show. India’s currency has rebounded
9.5 percent from an unprecedented low reached Aug. 28, while its
Indonesian counterpart has slipped 6.6 percent in that period.

SEB recommends investors buy India’s currency as Rajan will
likely increase the repurchase rate by 50 basis points to 8.25
percent in the next three to six months as the Fed prepares to
cut its record bond buying. Barclays says the RBI’s offer of
discounted swaps for dollars raised by banks, scheduled to end
Nov. 30, will help fund about 60 percent of the nation’s
current-account shortfall.

Barclays Strategy

“We believe India’s current-account deficit is adjusting
at a faster pace than expected by markets,” Barclays analysts,
including Siddhartha Sanyal in Mumbai, wrote in a Nov. 14
report. They recommend buying Export-Import Bank of India’s
bonds due in 2023 and selling Indonesia’s 10-year debt.

Both nations run current-account and fiscal deficits, are
tightening monetary policy to rein in price pressures amid
slowing growth, and face political risks before national
elections due next year. What differentiates India is that most
of its debt is held by locals, allowing for greater policy
flexibility, according to Spiro Sovereign Strategy.

Global funds held 1.59 percent of India’s outstanding
local-currency sovereign debt as of the end of June, compared
with 31.9 percent of Indonesia’s, official data show

‘Rock Solid’

The composition of India’s investor base helped attract
Union Investment Privatfonds GmbH to its debt, while staying
underweight on Indonesia. Sergey Dergachev, senior portfolio
manager at the Frankfurt-based company, who bought dollar bonds
of Reliance Industries Ltd. and HDFC Bank Ltd., said holding
patterns matter in times of market turbulence.

“The best Indian credits like Reliance or State Bank are
rock solid, and have the ammunition to withstand market
turmoil,” Dergachev, who helps oversee about $9 billion of
assets at Union Investment, said in a Nov. 18 e-mail interview.
“When U.S. tapering talk resumes, I will expect Indonesia to
underperform significantly” versus India, he wrote.

Even as investors react to risks in India and Indonesia,
the nations won’t be “avoided entirely” because they offer
relatively higher sovereign yields by way of compensation, Ramin Toloui, Singapore-based head of emerging markets at Pimco, said
in a Nov. 14 interview.

‘Pick Your Poison’

Indonesian yields are still attractive and will continue to
attract inflows, Priyo Santoso, who helps manage about $1.7
billion of assets as chief investment officer at PT Mandiri
Manajemen Investasi in Jakarta, said in a Nov. 19 interview.

“There are significant differences between India and
Indonesia but worrying parallels as well,” Nicholas Spiro,
managing director at Spiro Sovereign Strategy in London, said in
a Nov. 19 telephone interview. “For investors, it’s a case of
‘pick your poison.’”